The medical equipment market operates in a global marketplace, with competition not restricted by geographic location. This is reflected in the purchasing policies and procedures of the NHS as it sources products and services internationally. In 2015, the medical equipment market (including equipment and supplies) is estimated to have reached a value of £5.5 billion, representing 2% growth over the previous year. An increase in capital expenditure in the NHS, prompted by the need to replace or service ageing machinery, has acted as a stimulus for growth. Since 2011, the market’s value has risen by more than £1.2 billion from £4.2 billion - equivalent to a cumulative 29% increase.

Figure 1: UK Market for Medical Equipment, 2011-2015, (£ Million at MSP)

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Source: MBD analysis of ONS data and trade estimates

The value of the medical equipment sector is estimated to have increased by just less than 2% to £4.3 billion in 2015. This is expected to be driven by increased demand for electromedical equipment, which has risen most steadily in value over the last five years. Demand for electromedical and x-ray equipment has risen in recent years due to the need to replace much of the stock capital equipment deployed in the NHS, and the desire to accelerate the early detection of diseases, such as cancer. The medical supplies sector, consisting of consumable products, is estimated to have risen by a more subdued 9% since 2011, with the sector valued at £1.1 billion in 2015.

Figure 2: Segmentation of the UK Market for Medical Equipment, by Type, 2011-15, (£ Million at MSP)

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Source: MBD analysis of ONS data and trade estimates

Demand for healthcare services has grown in recent years as the number of people needing treatment for chronic illnesses has climbed. This has created demand for medical equipment and supplies in hospitals and care facilities that support such individuals. The rising incidence of chronic diseases, such as diabetes, hypertension, osteoporosis and other age-related diseases, will necessitate enhanced products and longterm, postsales service. Between 2006/07 and 2014/15, the number of people with cancer, dementia, kidney disease, and diabetes experienced the greatest increases - rising by a respective 160%, 100%, 46%, and 45%. Industry participants will be required to develop solutions best matched to customer needs to continue to be competitive. The prevalence of high competition and the ever-rising costs of medical products and services will require enhanced sales and market strategies, and longterm partnerships with companies.

The UK population is projected to increase to 2020, with the greatest growth forecast among the over-45s. The number of people aged between 45 and 74 years old is expected to rise by 4% to 2020, while the number of over-75s is expected to increase by 15% to 6.1 million. This will increase demand for medical care, with deteriorating health in later life necessitating more regular attention and more complex treatments. Growing demand for medical care, and consequently medical equipment, is intensified because the life expectancy of the population continues to rise. The demographic change also has implications for the government’s ability to pay for medical equipment, with the increasing bias towards older age groups expected to reduce the tax revenues the government, which is the biggest customer in the market, requires to invest in medical equipment.

Growth in the UK medical equipment industry is hugely dependent on the NHS, which is the primary customer for the industry. Spending on NHS healthcare by central government slowed in the aftermath of the recession as public sector finances were put under stricter controls. However, plans were laid out to increase NHS funding to 2020/21 in the government’s most recent spending review, conducted in November 2015. Despite this, budget plans are predicted to fail to keep pace with rising costs within the NHS. The financial pressures on the NHS and continued demand for efficiency savings - 3.8% is the headline efficiency factor for the NHS over 2015/16 - has led to some of the more expensive medical equipment, such as CT scanners, remaining in service in hospitals for longer. Such equipment has to work perfectly, while there is also the risk of some parts becoming unavailable for machines if they break down or become faulty when used beyond a certain date.

In 2015, the value of UK production of medical equipment and supplies is estimated to have marginally fallen year-on-year to £3.95 billion. The value of production has fluctuated since 2011, as the balance between domestically produced equipment and imports has changed, with demand for imported equipment outstripping the UK equipment exported.

Figure 3: UK Production of Medical Equipment, 2011-15, (£ Million at MSP)

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Source: MBD analysis of ONS data and trade estimates

Production of furniture and electromedical equipment increased by the largest margins over the five-year review period, from £108 million to £210 million, and from £353 million to £500 million, respectively. However, the production of syringes and needles, and orthopaedic devices declined by a respective 58% and 23% as imports accounted for an increasing share of demand in these sectors.

In more expensive areas of capital equipment, the UK has significant trading relationships with the US and Germany. For example, the UK imported £69.2 million of X-ray equipment from the US in the year to September 2015, which was close to the total import value of the rest of the non-EU combined (£80.6 million), according to UK trade statistics. This was the same in the electromedical equipment sector, where Germany is the UK’s largest import trading partner in Europe, at £72 million in the same period to September 2015; while the US was the UK’s biggest import source globally, at £52.6 million.

The US is also a significant export partner, accounting for the highest share of international sales across a range of medical equipment product categories. This includes e syringes and needles (44% of the non-EU export total in the year to September 2015), medical dressings (35%), X-ray (34%), electromedical (43%), and orthopaedic equipment (37%).

The past decade has brought unprecedented change to the medical equipment sector, and the pace seems to be accelerating. New regulatory requirements, fierce competition, and rapidly emerging technologies are creating new complexities and challenges for those operating in the sector. As governments in many parts of the world seek to reduce healthcare costs, there is pressure to develop products with lower price points, which also puts a further squeeze on profit margins.

Medical equipment companies possess several features that give them unique advantages over other companies. In many ways, medical equipment companies are similar to the pharmaceutical industry. However, unlike the pharmaceutical industry, which is known for its lengthy research and development process, the medical equipment industry enjoys a relatively short product life-cycle and investment recovery period.

Leading companies are consolidating their positions to access the new technologies and markets required to maintain global competitiveness and maintain margins - especially in a market where value for money is important to purchasers.

2014 proved a strong year for global mergers and acquisitions, with more than 300 deals recorded. US-based companies dominate the market, accounting for more than half of completed transactions, worth roughly £14 billion.

However, 2015 saw the largest ever deal in the industry’s history with Medtronic’s £34.7 billion (£24.3 billion) acquisition of Covidien in January. This was the latest in a line of big deals that have occurred in the sector over the last few years. Since June 2014, the medical equipment sector has seen six deals above the £1 billion transaction value mark.

Smith & Nephew plc, the UKbased medical device manufacturer, acquired EuroCiencia Colombia SA, a Colombiabased distributer of orthopaedic reconstruction, trauma and sports medicine products, for an undisclosed amount.

Irish marketing and distribution company, DCC plc acquired Williams Medical Supplies from UK private equity firm, Livingbridge for £55.3 million. Williams Medical Supplies distributes medical supplies to the UK healthcare market and is a leader in the industry.

In the 2015 Spending Review, published in late November, the chancellor of the exchequer announced an increase in NHS spending in England from £101 billion in 2015/16 to £120 billion in 2020/21. The NHS will be provided with an additional £10 billion per annum, with £6 billion a year available by the first year so the NHS’s own Five-Year Forward View can be fully funded. However, the government also reiterated that it expected the NHS to deliver £22 billion of efficiency savings to help deliver the best value from NHS resources, while there was a 25% cut in the Whitehall budget of the DoH - which could potentially reduce expenditure and investment in the medical equipment and supply industry.

Industry expansion will be driven by the introduction of innovative devices and the demand generated by illnesses associated with the aging global population. Cardiac and respiratory diseases generally affect the over-65s, and with this segment of the population expected to rise by a considerable amount over the next decade (and onwards), equipment and devices used in the treatment of agerelated illnesses will see significant growth in revenue. The need to replace older equipment and update equipment to meet new regulations will drive growth in market value over the foreseeable future. The value of the medical equipment and supplies market is forecast to increase by a cumulative 16% in real terms between 2016 and 2020 to £6.5 billion.

Figure 4: UK Market Forecast for Medical Equipment, 2016-20, (£ Million at 2015 prices)

Source: MBD forecasts

Demand for more advanced diagnostic equipment, such as X-ray and electromedical products, is expected to grow over the next five years. In the NHS, there is understood to be a growing need for the replacement of much of this type of capital machinery. This was reflected in the increased NHS capital expenditure budget over the past year. Demand for medical supplies is also expected to rise, although behind growing demand for medical equipment. This reflects the implementation of further procurement measures by the NHS, which continues to seek to drive down the price paid for many basic consumable products and help make the efficiency savings the government requires until 2020/21.

Figure 5: UK Market Segmentation Forecast for Medical Equipment, by Type, 2016-20, (£ Million at 2015 prices)

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Source: MBD forecasts

As decision makers become more cost conscious and the rate of consolidated competition increases, opportunities to serve valueoriented customers are growing fast in the industry. Manufacturers changing the equipment they make may not necessarily improve profit margins, but adapting business models or service offerings to the value-based market may do so. Over the next few years, significant deal activity is expected in areas such as early diagnosis, patient homecare devices, and technologies that provide early detection. Consolidation is also expected around technologies that reduce surgical interventions and long hospital stays, which, in turn, reduce waiting times and unnecessary admissions.